It's the bidding war of the summer! Warren Buffett has teamed up with Occidental Petroleum to lend support to its $57 billion ($75 per share) bid for Anadarko Petroleum. That means that if Oxy CEO Vicki Hollub can convince Anadarko to abandon its already-announced deal with Chevron and instead join up with Oxy, then Berkshire Hathaway will inject $10 billion cash into Oxy in exchange for preferred stock paying 8%. Berkshire would also get a warrant to buy $5 billion of Oxy stock at $62.50 per share. It's currently at $59.
Occidental had already arranged financing for the $19 billion cash portion of its bid, but bringing on Buffett gives Hollub more heft. “A high quality backstop, such as Berkshire, is a good stamp of approval,” notes Tim Rezvan of Oppenheimer & Co. in a research note today. “But Oxy management said there was full financing in place already.” He sees 8% preferred stock as more “debt-like,” lamenting that it would boost the pro-forma Oxy-Anadarko’s annual dividend burden by $800 million a year to more than $4 billion, making it tougher for Hollub to grow payouts in the future.
Hollub, 59, is hungry for this deal. She ran Oxy's Permian division for years before becoming the first woman to run a big American oil company. Oxy’s bid for Anadarko now stands at $75 per share, including $38 per share in cash and .61 Oxy shares. That’s about a 20% premium to Chevron’s $65 per share package featuring $16.25 in cash plus per share in cash plus .39 Chevron share for each of Anadarko’s.
Sometimes it takes a giant like Buffett to scare off a giant. Clearly Chevron is the bigger, stronger company, the more stable choice. But Oxy's bid is higher, with a bigger cash component. And by bringing in backstop Buffett at the near-usurious rate of 8%, Hollub has made it much easier to close the deal, perhaps even removing the need to put it to a vote of Oxy shareholders. It could prove a costly dalliance. If Anadarko does call off the marriage it will have to pay Chevron a $1 billion breakup fee.
Warren Buffett is already one of the nation’s biggest energy investors. Operating division Berkshire Hathaway Energy generated $2.6 billion in net income last year from its vast holdings of power plants and distribution lines across the West, including MidAmerican Energy and PacifiCorp; it has invested more than $10 billion in solar and wind power. A chunk of Berkshire’s insurance company float is currently invested in $1.1 billion shares of oil refiner Phillips 66, and a $350 million stake in Canadian oil operator Suncor. In the past Buffett held big stakes in ExxonMobil and ConocoPhillips as well. Berkshire also has a wholly owned company, Marmon, that makes railroad tank cars that carry oil and petroleum products and has generated billions in profits in recent years thanks to the U.S. crude oil boom (look for UTLX or Procor on the side of tank cars the next time you’re stuck at a rail crossing). Berkshire also owns a piece of truck stop chain Pilot Flying J. Hedging its bets, Berkshire is also a leading investor in Chinese electric vehicle maker BYD.
Should you follow the Oracle of Omaha and consider adding Oxy to your portfolio? The numbers look good. Oxy generated $5 per share in earnings last year, for a trailing P/E of 12 at $60 per share and a secure dividend of 5%. Even without Anadarko, Oxy has decades of work ahead of it in the Permian. If for some reason Hollub and Buffett can’t pull off this deal, it could put a target on Oxy’s back, which could put some life back into its shares.
Can we expect a counter offer from Chevron? William Featherstone, an analyst at Credit Suisse, figures that Oxy’s bid still represents a 15% discount to Anadarko’s net asset value, meaning that the bidding war could continue beyond $80 per share. Chevron doesn't appear to be in a hurry to up its bid. "We believe our signed agreement with Anadarko provides the best value and the most certainty to Anadarko's shareholders," says Chevron spokesperson Kent Robertson.
And if it doesn't work out, analysts see plenty of other Permian players ripe for the picking, such as Pioneer Natural Resources, Parsley Energy, Callon Petroleum, Centennial Resource Development and Noble Energy.